Ruling against OMT means ECB will stay on sidelines

ECB President Mario Draghi knows that there won’t be any quantitative easing in Europe.

LONDON (MarketWatch) — After the European Central Bank unveiled its celebrated outright monetary transactions program to shore up weaker euro-bloc members’ debt in the fall of 2012, I recalled 18th century French philosopher Voltaire’s quip that the Holy Roman Empire was “neither holy, nor Roman, nor an empire”. My view was that future historians might say that the OMT was nether outright, nor monetary nor a transaction.

Even though the eye-wateringly complex OMT device masterminded by Mario Draghi, the ECB president, has been remarkably successful in lowering euro-bloc yield spreads, it remains non-operational.

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The judgment was as expected. It confirmed the constitutional court’s long-practiced custom both of upholding German parliamentary scrutiny over bailout actions and also of refusing to hand down direct verdicts that could wreak havoc on financial markets. Both plaintiffs and defendants in the bond-buying standoff have something to celebrate.

The psychological effect, though, is clear. The OMT cannot be used while the legal uncertainty remains.

The German government and Parliament, which would have a big say in unleashing the mechanism by approving an economic program to be carried out by applicant countries, will make sure that this nuclear missile remains firmly bunkered down in its launch silo.

The overall message is extremely important in clarifying responsibilities behind euro-area governance. Markets and governments know that the onus for shoring up the euro is on politicians, not central bankers.

This is a message with which both Draghi and Jens Weidmann, the Bundesbank president, who argued fiercely against key aspects of the bond-buying scheme at the Karlsruhe court hearing last summer, will agree.

The court decision will have a secondary effect by making even less likely that the ECB will move to any kind of wholesale across-the-board quantitative easing of the sort carried out in the U.S., U.K. and Japan in recent years. Draghi had already distanced himself from speculation about such action in recent weeks.

The ECB council’s refusal to cut interest rates at its monetary-policy meeting last Thursday, citing the need for further data on both inflation and growth on the 18-country area , confirms that the ECB is unspooked by worries of incipient deflation in parts of the euro bloc.

Public opinion in the crisis countries remains volatile, with a strong anti-euro protest vote expected in the May elections to the European Parliament. Bank of Greece Gov. George Provopoulos, speaking at an Official Monetary and Financial Institutions Forum lecture in London on Friday, underlined the economic and political risks facing his country, in spite of his strong message that “Grecovery” and not “Grexit” (a Greek exit from the euro
EURUSD, +0.0000%
) was on the way.

Throughout the euro area, decision makers are lined up firmly in the direction of maintaining fiscal and monetary discipline and supply-side reforms, witnessed by French President François Hollande’s swing (much praised, not surprisingly, in Berlin) towards German-style austerity. All this could come unstuck. But for the time being, euro orthodoxy is in place — and the German constitutional court’s double-edged judgment confirms that.

ECB officials have been at pains in recent weeks to deliver a Bundesbank-style message that even talk of across-the-board central bank bond-buying could cause governments in crisis countries to go easy on reforms still needed to propel the euro area out of fragile recovery into a full-fledged upswing.

Indeed, vaunted disagreements between the Bundesbank and the ECB on key aspects of European monetary policy are now rarely on display. Draghi’s words and actions have placed him far more in the Weidmannesque camp than was previously realized. The Bundesbank itself has been conspicuously doing its best to support the Draghi line against constantly skeptical German public opinion.

A tide of arguments mitigate against further across-the-board European easing.

These range from the incipient, though modest, recovery in the euro area and the awkward juxtaposition of the ECB’s comprehensive assessment of banks’ balance sheets, which could be easily compromised by large-scale action to ease credit or raise prices on government bonds. The anti-QE arguments include, too, the start of Federal Reserve tapering of its own QE program, and the inconclusive, if not negative, results of the Bank of Japan’s massive bond purchases.

Both the Bundesbank and the ECB agree that any future euro-area asset-purchase schemes need to be geared to private-sector assets such as bundles of bank loans that could be developed for securitization purposes. The ECB is still some way from finalizing technical preparations for such measures — and no doubt hopes that, like the OMT, they will become increasingly unnecessary as time goes on.

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